Benefits of a 529 College Savings Plan
January 10, 2011, By Josh Katzowitz 0 comments
As my wife and I planned for the birth of our children, we strolled through the litany of baby planning. Crawled through it, really. We went to the baby superstore, stocking up on strollers, diapers and pacifiers. We unfurled the directions and cranked together the bassinets, the gliding chair and the cribs. We bought the tiny clothes, we bought the soft picture books, we bought the baby bottles, the tiny hairbrushes and the tear-free shampoo.
We were ready. Mostly ready.
But before our kids emerged, we sat together and discussed the best ways to start saving for college.
Education, for us, is important. We both attended one of the best public high schools in our state, we both won scholarships to college, we obtained our college degrees in four years and my wife went on to attend one of the top medical schools in the country.
We don’t want to live in the suburbs of whatever city we’re residing, but if that means the kids attend the best schools around, we’ll make the sacrifice and set up shop near the Red Lobster, the Best Buy and the 18-screen cinema so they’ll have a chance at the best public education possible (we’re not private school people, so that’s probably out the window).
When the two of us sat down to figure out the best way to save, we almost immediately decided the best move for us was to begin contributing to a 529 plan.
In case you’re unaware – or in case you and your wife will soon be discussing the ways for how to set up a college plan for your unborn child – a 529 is an education savings plan operated by a state or educational institution that helps you set aside funds for future college costs (let it be noted that I paraphrased that definition from savingforcollege.com, a handy little web site that tells you how to … um … save for college).
So, why a 529?
“The 529s are a great thing, because you can set aside money for your kid in a tax-deferred vehicle, and if you use it for school, it’s tax free,” said financial advisor Byron Larkin, who counts a number of current and former professional athletes among his clients.
Like a 401(k) or an IRA, you invest your contribution in mutual funds. Sometimes, the money increases. Sometimes, you take a hit. But like a 401(k) or an IRA, you’re going to come out with more money than you put in. That’s the theory, at least.
But, like Larkin says, there are also positive tax implications.
“If you put the money into a state-sponsored 529, you get a state income tax deduction,” he said. “What you’re doing is you’re putting money away for college, you’re getting an income tax deduction for it and you’re not paying any taxes on it. That’s the best.”
For example, I used to live in Ohio. As Larkin says, if I still lived there and wanted to use the state’s 529 plan, I could deposit $2,000 for each of my kids, and at the end of the financial year, I’d receive a $4,000 tax deduction.
“You’re putting your money in, it’s growing tax-deferred and as long as they use it for a number of things – books or tuition – you’re not going to pay any taxes on it when you take it out,” he said.
But the most important thing for my wife and I was to get started as soon as the babies were born. As savingforcollege.com points out, if you enrolled in a public school in 2010, it would cost you an average of $32,600 for tuition and fees and $121,800 for a private school. In 2028, 18 years from when I’m writing this story, those costs will rise to (take a deep, calming breath) $92,900 for a public school and a cool $347,700 for a private school.
Of course, the 529 isn’t right for everybody. As this story in U.S. News and World Report points out, a savvy investor could make more money investing the money on his or her own, you can make only one change per year in a 529 plan, and your choices for mutual funds could be limited. Plus, if your child doesn’t use the money for school-related expenses, you won’t get the state income tax deduction and you could take a 10 percent federal tax penalty on the earnings.
But for my wife and I, the 529 plan works. That’s the way we planned it, anyway. Hopefully, I can say the same 18 years from now.
